S-Corp Savings Calculator
Enter your business net profit, the reasonable W-2 compensation you'd pay yourself as a shareholder-employee, and your filing status. The calc compares an S-corp election against a Schedule C sole proprietorship on the same profit.
Results
Why an S-corp election can save money
A sole proprietor (or single-member LLC taxed as a disregarded entity) reports business income on Schedule C and pays self-employment tax under IRC §1401 on 92.35% of net earnings — 12.4% Social Security up to the wage base plus 2.9% Medicare, with a 0.9% Additional Medicare surtax above $200,000 (single) / $250,000 (MFJ). That's 15.3% (plus surtax) on essentially the entire profit.
An S corporation, elected under IRC §1362 by filing Form 2553, is a pass-through entity. The shareholder-employee draws a W-2 salary — "reasonable compensation" — and receives the remaining profit as a distribution reported on Schedule K-1. FICA applies to the wages only; the K-1 distributive share is not subject to SE tax per IRC §1402(a) and Rev. Rul. 59-221. Income tax still applies to the combined wages plus distribution.
What the calculator does
- Computes the employer half of FICA on your wages (6.2% Social Security up to the $184,500 TY2026 wage base plus 1.45% Medicare) and subtracts it from net profit to derive the K-1 distributive share.
- Computes the employee half of FICA on your wages, including the 0.9% Additional Medicare surtax if wages exceed the filing-status threshold under IRC §3101(b)(2).
- Applies TY2025 federal income-tax brackets (per Rev. Proc. 2024-40 §3.01) and standard deduction to the combined W-2 wages plus K-1 distribution.
- In parallel, computes what you'd pay as a sole proprietor on the same net profit — SE tax under §1401 with the same Social Security cap plus the §164(f) half-SE-tax deduction, then federal income tax on the remainder.
- Returns the dollar savings, or flags a negative savings result when your inputs would produce a worse tax outcome under S-corp (e.g., wages exceeding the profit).
Assumptions and limits
- Federal income tax only. State income tax varies widely (California charges an additional 1.5% S-corp franchise tax; New York City charges an unincorporated business tax on sole props; check your state).
- The comparison assumes the S-corp has no other employees, no fringe benefit costs, no state franchise or minimum-entity tax, and no additional accounting or payroll fees. In practice budget $1,000-$3,000/year for the 1120-S return and payroll compliance.
- The §199A qualified business income deduction is not modeled. Both structures generally qualify; the wage-limit interaction can favor S-corp above the phase-in thresholds.
- Retirement contributions (Solo 401(k), SEP-IRA), health insurance treatment, and Section 125 cafeteria plans are not modeled.
- Wages must reflect reasonable compensation — underpaying yourself to inflate the K-1 distribution is a leading S-corp audit trigger.
Frequently asked questions
How does an S corporation save taxes compared to a sole proprietorship?
A sole proprietor pays self-employment tax (12.4% Social Security up to the wage base plus 2.9% Medicare) on 92.35% of net earnings from self-employment. An S-corp shareholder-employee pays FICA only on the reasonable-compensation W-2 wages they draw; the remainder distributed as a K-1 pass-through is exempt from FICA per IRC §1402(a) and Rev. Rul. 59-221. The FICA savings on the distribution portion is where the S-corp benefit comes from.
What is "reasonable compensation" for an S corp shareholder-employee?
IRC §162(a) requires a shareholder providing services to receive reasonable compensation. The IRS applies a facts-and-circumstances test based on training, experience, duties, time devoted, comparable salaries, dividend history, timing and manner of payments, and what a comparable business would pay for similar services. In David E. Watson, P.C. v. United States (8th Cir. 2012) the court upheld the IRS reclassifying $67,044 of the $203,651 in distributions as wages. Setting wages artificially low to dodge FICA is the top S-corp audit trigger.
Does the S-corp itself pay any tax?
In most cases no. An S corporation is a pass-through entity under IRC Subchapter S — the entity files Form 1120-S and issues each shareholder a Schedule K-1. Ordinary business income, deductions, and credits flow through to the shareholder's Form 1040. Exceptions include the built-in gains tax under §1374 for corporations that converted from C-corp status and the passive investment income tax under §1375. The S-corp is also responsible for the employer half of FICA on wages paid, but this is deductible against ordinary income.
Are there costs to running an S corp that offset the FICA savings?
Yes. Ongoing costs typically include (a) a separate Form 1120-S return (roughly $800-$2,000/year at a CPA), (b) payroll processing to run W-2 wages ($300-$800/year), (c) unemployment insurance (federal FUTA plus state SUTA) on wages, (d) state franchise or minimum-entity taxes (California charges $800/yr; some states charge more), and (e) higher bookkeeping burden. As a rule of thumb, the S-corp election typically breaks even around $40,000-$50,000 of net profit above what you'd pay yourself as reasonable comp; below that, the compliance overhead can exceed the FICA savings.
How does the Section 199A QBI deduction interact with the S-corp choice?
Both S-corp K-1 distributive share and sole-prop Schedule C net income qualify for the 20% qualified business income deduction under IRC §199A, subject to taxable income thresholds and the specified service trade or business (SSTB) limitations. However, W-2 wages paid to the shareholder-employee do NOT qualify for QBI on the recipient's side but DO count toward the §199A(b)(2) wage-limit for the entity. For higher earners (above the §199A phase-in thresholds), an S-corp with sufficient W-2 wages can preserve QBI where a sole prop with no wages might have it limited. This calculator does not model §199A — factor it in with a CPA.
Related calculators
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- 1099 Tax Calculator — federal + SE tax for independent contractors
- LLC Tax Calculator — single-member LLC on Schedule C
- Quarterly Estimated Tax Calculator — Form 1040-ES payments
- Paycheck Calculator — net take-home from W-2 wages
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